Argentina’s financial elite were shocked with the US Supreme Court ruling, handing a win to Paul Singer of Elliott Management and other “holdout” investors who are now in a position to collect on the debt owed to it. However, Argentina, as planned, is moving to restructure their debt, which could leave the holdouts in the cold, for now.

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Argentina expected to default on its bonds

“It seems to Paul Clement and to us that a denial of the cert petition in the first opportunity that the Court has to deal with the case is the least likely scenario, but it is not impossible,” a confidential memo from Argentina’s New York lawyers advised Argentina, as previously reported in ValueWalk.  In an earlier ValueWalk article early in May we indicated Argentina would be expected to default on their bonds.

That default time has apparently come.

“We cannot allow (holdouts) to prevent us from honoring our commitments to creditors,” Kicillof told a news conference reported by Reuters. “For this reason we are starting the steps to start a debt swap to pay them in Argentina under Argentine law.”

Argentina will offer new bonds governed under Argentine law

Argentina’s reaction to the “least likely scenario” was capisulated in an announcement by Argentine President Cristina Fernández de Kirchner. She said her country would offer new bonds to its creditors governed under Argentine law, with the proposed debt swap would involving the 92% of the country’s creditors that agreed to restructure in the wake of the country’s 2001 default.

While the debt swap proposes an alternative for the South American country to avoid paying hold-outs, it fails to reverse the global implications on debt markets, debt restructuring and financial stability, noted JublieeUSA Executive Director Eric LeCompte. “Argentina may have a way to avoid paying the hedge funds but it won’t change how the court precedent equips predatory funds with a powerful ruling to force the poorest countries into submission,” he said.  LeCompte met with Pope Francis on the issue, as reported in ValueWalk, and emerged using the term “savage capitalism” to describe the hedge fund’s activity.

The hold-out creditors, including hedge funds popularly referred to as “vulture funds” because they buy debt cheaply when a country is in financial distress, sue developing countries for full payment when the country experiences recovery or has attained new assets earmarked for social investment. The International Monetary Fund, World Bank, United Nations and US government have all expressed concern about the impact of a ruling in favor of these funds, JublieeUSA notes. They have noted that the precedent set by this case could make it more difficult for developing countries to receive debt relief and lead to greater financial instability.

Implications on Argentina if it complies with the ruling

The issue for Argentina is if they comply with the ruling it would open the door to $15 billion in claims Argentina can’t afford to pay. “We are going to take the measures needed to be able to pay,” Kicillof told a news conference. “But we will also send our lawyers to talk to Judge Griesa to see what he is referring to when he says he isn’t pushing Argentina into a default with this ruling.” This indirect negotiation tactic, using the judge as a tool to force the holdouts into a settlement, appears the latest in last ditch efforts to settle the matter.

The deal must be closed by the end of the month, giving added pressure on negotiations with the hedge fund holdouts if such negotiations were to take place.